If South Korea had had sufficient foreign reserves during the 1997-98 Asian financial crisis, it would not have suffered from deadly massive unemployment and an economic crash. Its per capita GDP in 2018 would have been more than $50,000 instead of $31,363. Socially and politically much improvement could have been made in Korea.Foreign reserves are financial assets held by the central bank. These assets include foreign currencies, U.S. Treasury bills, Special Drawing Rights (SDRs), and an IMF reserve position.Foreign reserves are required for three reasons: (1) Private import payments unexpectedly exceed private export earnings, (2) The nation experiences a political crisis and cannot pay off foreign debt on time, or (3) The nation confronts international currency speculators during a currency crisis. All IMF member countries, even the U.S. and EU member states need to hold some amount of foreign currency reserves.The dominant part of foreign reserves consists of reserve currencies. Major reserve currencies are the U.S. dollar and the euro. Other reserve currencies include the pound sterling, Swiss franc, Canadian dollar, etc. The U.S. dollar is the world's dominant reserve currency. It should be noted that foreign currencies on reserve cannot earn interest.According to an IMF publication, the currency composition of foreign exchange reserves for 2018 is the following: the U.S. dollar (61.7 percent), the euro (20.7 percent), Japanese yen (5.2 percent), pound sterling (4.43 percent), Chinese renminbi (1.89 percent), Canadian dollar (1.84 percent), Australian dollar (1.62 percent), Swiss franc (0.15 percent), and other currencies (2.48 percent).The IMF periodically publishes the list of its member countries by foreign-exchange reserves. China holds $3.12 trillion as of June 2019 and South Korea $400 billion as of April 2019. Even reserve-currency countries are required to hold some amount of foreign reserves for at least one of the three reasons above: Japan holds $1.29 trillion as of May 2019; Switzerland, $800 billion as of May 2018; and the U.S., $130 billion as of January 2019. In the list, the U.S. ranks 20th.Trade disputes often occur when the U.S. government detects that the central banks of other countries have bought U.S. dollars in large amounts on international foreign exchange markets. The U.S. has been suspicious that China and other countries have manipulated their currencies for purposes of export expansion.To prevent currency manipulation and unfair practices in the currency markets by trade partners, the U.S. Congress enacted two laws: the Omnibus Trade and Competitiveness Law in 1988 and the Trade Facilitation and Trade Enforcement Act in 2015. By these two laws, the Treasury is required to submit a currency report to Congress every April and November.China is not the only target country for criticism by the U.S. Treasury Secretary Steve Mnuchin presented a report to Congress in April 2018, which stated that it had placed six countries ― China, Germany, Japan, South Korea, Switzerland, and India ― on its "monitoring" list.To lessen the suspicion by the U.S. and to restore normality in the international trade environment, the surplus countries need to formulate a new policy, a "Rules-based foreign reserve policy."The central bank intervenes in the foreign exchange market using a well-specified formula. By this, the public can predict when and what quantity of reserve currencies the bank will buy and what the impact on the exchange rate will be.The rules-based monetary policy stemmed from Milton Friedman's work. Friedman and his colleague, Anna Schwartz painstakingly reviewed the U.S. monetary history from 1867 to 1960 and their conclusion was not only that monetary policy was powerful but also that movements in money explained most of the fluctuations in output. To prevent economic fluctuations, he suggested the rule-based monetary policy, supplying money at a constant rate of X percent.The philosophy of the rules-based monetary policy was succeeded by John Taylor of Stanford University. He came up a formula for the central bank's short-term interest rate policy. This was ingeniously designed to reduce future uncertainties and has contributed much to the stabilization of the goods market and financial system.Along these lines, the rules-based foreign reserve policy can be formulated. It can be the solution to preventing the groundless criticisms of currency manipulation by the U.S. If the central bank of the non-reserve currency country intervenes in the foreign exchange market just using the formula, the U.S. president would not be terribly upset. This will also help the trade partners to drop their mutually-harmful tariff policy.Dr. Jeffrey I. Kim (ickim@skku.ac.kr), former foreign investment ombudsman, is a professor emeritus at Sungkyunkwan University. He earned a Ph.D. in economics at the University of Chicago and taught at the University of Colorado, Boulder, and the American University, Washington, D.C.